Five Themes Set to Dominate the Year Ahead – and How to Prepare

As we approach the New Year, a range of disruptive forces present distinct challenges for investors – playing out in the geopolitical arena in the form of trade wars, on the policy front in the form of divergent monetary policies, and on the economic front as countries contend with a late cycle environment.

To help guide through the noise, our Asset Allocation team has selected their top five themes and highlighted investment ideas that could be helpful in positioning for the year ahead, including:

Global trade wars – can China avoid a crisis? A deterioration in the relationship might have far reaching consequences, such as a weaker yuan and stronger US dollar, rising geopolitical tensions and slowing global economic growth. A less visible but potentially greater risk is the impact on US inflation.

However, if the trade conflict is resolved, Chinese assets could offer a buying opportunity at bargain prices.

Fixed income – a bias towards rising bond yields? Since the 2008 credit crisis, government bond yields have declined significantly, partly due to quantitative easing (QE) and partly due to subdued expectations about future short-term rates, inflation and economic growth. These expectations are reflected in the flat yield curve. With the tapering of QE and the beginning of the hiking cycle, we are now at a turning point, which could have significant consequences for bonds.

Tightening is dependent on continued economic strength; but if the economy slows, bonds may have another good year and could outperform equities.

Emerging markets – risk or opportunity? Higher US interest rates may attract capital flows away from emerging markets (EM) as the opportunity cost of being in safer US assets decreases. In addition, a combination of higher US rates with stable non-US rates should strengthen the US dollar, making it more difficult for EM countries to repay dollar-denominated debt.

On the other hand, the valuations of EM equity and bond markets look attractive after lagging their developed markets counterparts in 2018, particularly US equities. If an EM crisis doesn’t materialise, it may be a buying opportunity.

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